Interest-only Secured Loans – What You Should Know
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Scores of internet users have been searching “secured loans interest only”, seeking a secured loan where they only need to pay the interest on the loan for part of the repayment period.
But do these types of secured loans exist and if so, where can you find them? Read on to uncover the truth about secured loans with interest repayments only.
First, what is a secured loan?
A secured loan is a loan that includes collateral in the credit agreement. The borrower lists one of their assets – most often a property – as security in the loan agreement, which means the creditor can repossess and sell the asset to recover the debt only if the borrower cannot keep up with monthly repayments.
Failing to stick to monthly repayment could mean having your family home repossessed and sold.
Because the asset makes it much easier for the lender to recover any arrears, many people can borrow larger amounts at a lower interest rate by using secured loans over other types of credit. But you should think carefully before securing debts against your property or other assets and only use lenders that are authorised and regulated by the Financial Conduct Authority (FCA).
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Difference between a secured and unsecured loan
The big difference between a secured loan and an unsecured loan is that the unsecured loans do not require the borrower to use one of his or her assets as security in the loan agreement. If an unsecured loan is not repaid, the lender must use a lengthy and costly legal process to get its money back.
You are seen as a more appealing borrower by using a secured loan with less lending risk. And as a result, you can often borrow more and find a lower interest rate on a secured loan.
Can you get a secured loan with a poor credit score?
Because an asset is listed as security in the agreement, some people with a poor credit history can still get a secured loan. Even though they get approved for the loan, they may have to pay a higher interest rate compared to someone with an average or excellent credit history.
How do secured loan repayments work?
Most secured loans give the borrower a lump sum amount and they must then repay some of this money and a rate of interest back each month for so many months, as agreed before accepting the secured personal loan.
This continues for the full period until all of the principal loan amount and interest is repaid. If multiple repayments are missed, the lender will start to consider repossessing your asset and selling it.
What are secured loans interest only?
The concept of a secured loan with interest only repayments is different to what is described above. These loans would provide the borrower with a loan amount and they would then only have to repay the interest on this amount rather than the principal value.
It sounds too good to be true, so do secured loans interest only really exist?
Can you get secured loans interest only?
You cannot get a secured loan where you only need to pay an interest rate on the amount borrowed and then never have to pay the principal loan amount back. Doing this would be like getting free money, unless the interest rate was above 100%.
However, there is one type of secured loan where the borrower only has to make interest payments for a prolonged duration before starting to repay the principal loan amount and a rate of interest.
Secured loans interest only – an option
There is one secured loan that asks for interest-only payments for a fixed duration at the start of the repayment term, and it is known as a home equity line of credit, shortened to HELOC. These loans are also known as a type of second charge mortgage.
A HELOC is a secured loan against your home equity, which you can calculate by taking away your remaining mortgage payments from the value of your home. You borrow against your home equity and the lender can repossess and sell your home to recover any potential debts.
The HELOC provides the homeowner with a loan that can be accessed over a draw period. This draw period can last many months or even years, allowing the homeowner to take parts of the loan in stages. It’s sometimes used to complete home renovations in stages and help budget for large-scale projects.
During the draw period, the homeowner is only required to pay a variable rate of interest on the loan amount, making it somewhat of a secured loan with interest-only repayments. However, once the draw period is over, the homeowner must start paying off the principal loan amount and the interest rate over a fixed term until all of the loan is repaid.
Are there any other interest-only secured loans?
A HELOC is the only type of secured loan that comes close to interest-only monthly repayments. But there are some equity release products that are even closer to this concept. For example, a reverse or lifetime mortgage could enable a homeowner to release equity from their home but are only required to make interest payments back. Once the homeowner dies or goes into aged care, the property is sold to clear the principal debt.
Secured loans interest only (quick recap!)
Secured loans where only interest payments are required is somewhat of a pipedream. Yet, there is one type of secured loan that doesn’t require any principal repayments for some time, namely a HELOC. A closer financial product to this concept is a reverse mortgage used to release equity.
Stacks more info on secured loans
For plenty more information and top tips on secured loans in the UK, read more about them here at MoneyNerd. We’ve covered these loans from all angles to answer the internet’s most asked secured loan questions.